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Private Placement of Debt through E-Book

Finsec Law Advisors

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SEBI on December 04, 2015, released a consultation paper on “Primary market debt offering through private placement on electronic book”, seeking to develop the corporate bond market. Majority of corporate bonds are issued through private placement, which are negotiated over-the-counter deals. Hence, SEBI has proposed having an electronic book for private placements, as opposed to an over-the-telephone market, to make the price discovery mechanism transparent and reduce the cost and time taken for issuance of corporate bonds. In the proposed mechanism, an issuer would enter into an agreement with an Electronic Book Provider which would provide an electronic platform for collection and processing of bids from potential private investors. Eligible EBPs would include regulated market infrastructure institutions, such as recognized stock exchanges and depositories, and Category-I Merchant Bankers (having minimum networth of Rs. 100 crores). Further, SEBI wishes to provide for efficient dissemination of information and resolution of disputes between the issuer, EBP and bidders through arbitration.

Although the concept of the E-book appears attractive, it may be more dangerous than useful. SEBI needs to treat the issue, at best, as a slow experiment. While transparency and structure are desired in the corporate debt market, they would come at the cost of flexibility. The parties involved are large corporates, mutual funds and sophisticated institutional investors who need the flexibility to negotiate terms of the issuance, for instance, whether to have arbitration or not. As shown in the paper, a sophisticated negotiated private placement market is preferred to public offers of debt securities. The needs of such investors regarding comfort, transparency and structure are already being met through credit rating and listing. Further, parties already negotiate greater details than those sought to be introduced through the E-book. Introducing regulatory rigidities which neither the issuer nor the investor want, or need, may shrink the market, which has been growing considerably over the past decade.

Therefore, the apparent benefits of an E-book, such as those pertaining to timing, yield details, arbitration, in our view, may not be significant given the needs of a sophisticated market. Introducing a mandatory E-book would, in fact, hurt the growth of the market without any benefit to investors, corporates or the economy in general. Nevertheless, the E-book may be introduced strictly on an optional basis, in order to evaluate its benefits better.